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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI DUVVURU RL REDDY, HON’BLE & SHRI S BALAKRISHNAN, HON’BLE
order of the Learned Commissioner of Income Tax (Appeals)-3, Visakhapatnam [Ld. CIT (A)] in appeal Nos. 211, 212 & 213/2017-18/CIT(A)-3/VSP/2019-20, dated 31/10/2019 arising out of the orders passed u/s. 143(3) r.w.s 153A of the Income Tax Act, 1961 [the Act] for the AYs 2013-14, 2014-15 & 2015-16.
Cross Objections are filed by the assessees in connection with the appeals filed by the Revenue. Since issues raised in these appeals are inter-connected, for the sake of convenience, these appeals are clubbed, heard together and disposed off in this consolidated order. Appeal wise adjudication is given in the following paragraphs of this order.
Brief facts of the case relevant to the AY 2013-14 are that the assessee – M/s. ATR Warehousing Pvt Ltd., Visakhapatnam – engaged in the business of warehousing filed its return of income for the AY 2013-14 on 31/10/2013 declaring a total income of Rs. 1,97,91,850/-. The Directors of the assessee company are Sri A. T. Rayudu and Sri A. Avnash who hold each 45% of share holding in the company. The case was selected for scrutiny by 3 CASS and a notice U/s. 143(2) was issued on 15/09/2014 but the assessment got abated as search and seizure operations U/s. 132 of the Act were conducted on 14/10/2015 in the case of the assessee and also in the case of Sri A.T. Rayudu, Smt. Ammaji, Sri A. Avnash and Smt. A. Harshitha simultaneously. During the search proceedings certain documents and loose sheets were found and seized and tagged as Annexure No. A/ATR/PO/Res/1 etc. Accordingly, notice U/s. 153A was issued to the assessee on 18/07/2016 which was served on 20/07/2016 and called for filing of the e-return of income for the AY 2013-14. In response, the assessee vide its letter dated 26/07/2016 stated that the income filed U/s. 139 on 31/10/2013 may be treated as return filed in response to the notice U/s. 153A of the Act. Again the assessee was asked to file its return of income U/s. 153A electronically and submit a copy accordingly the assessee filed its return of income U/s. 153A electronically without any changes prior to and after the search operations. Thereafter, notice U/s. 143(2) was issued and served on the assessee on 19/6/2017 in response to which the assessee’s representative furnished details of computation of income. Subsequently notice U/s. 142(1) was issued on 21/7/2017 called for copies of financial statements, books of account, bank account statements, Wealth Tax return,
4 details of TDS etc., and the assessee furnished the required details.
After verification of the books of accounts, the Ld. AO noted that during the year the assessee company availed certain loans from various parties during the year and the assessee was asked to explain the same along with proper documentary evidence.
After considering the submissions of the assessee and on perusal of the material available before the Ld. AO, the Ld. AO was of the opinion that the assessee failed to prove that the purported loan transactions with the companies mentioned in the books of accounts are genuine unsecured loans and thereby assessee did not discharge the onus cast on it. Accordingly, the sum of Rs. 15,11,00,000/- appearing in the books of account of the assessee under the head unsecured loan, was treated by the Ld. AO as unexplained cash credit U/s. 68 of the Act and added the same to the total income of the assessee. The Ld.AO also made addition of Rs. 97 lakhs u/s. 68 of the Act as the said amount was mentioned in the books of account under the head unsecured loans from 11 individual loan creditors and was not properly explained by the assessee. Further, the Ld. AO made addition of Rs. 32,56,608/- by disallowing the claim made by the assessee as 5 interest on unsecured loans availed during the year as well as during the FYs 2010-11 and 2011-12. Further, the Ld. AO made addition of Rs.75,05,08,016/- U/s. 56(2)(viib) of the Act, being the amount collected for the 1,93,655 shares in excess of fair market value of such shares issued by the company to the seven companies as mentioned in the assessment order. The Ld. AO made another disallowance of Rs. 8,66,489/- by invoking the provisions of section 14A of the Act. Further, the Ld. AO made addition of Rs. 1,33,58,461/- by invoking the provisions of section 40(a)(ia) of the Act as the assessee failed to deduct the tax at source on the impugned interest claimed. Further, the Ld. AO by observing that since the peak advance given by M/s. Usha Tubes & Pipes Ltd amounting to Rs. 44,06,653/- to the assessee company qualifies as deemed dividend u/s. 2(22)(e) of the Act the same is liable to be treated as income from other sources and added the total amount to the income returned by the assessee.
The Ld. AO also made addition of Rs. 2,13,211/- as the long term loans and advances given by the assessee are not related to the business activities carried out by the assessee and therefore the interest paid to the bank relatable to such interest free advances are not allowable U/s. 36(1)(iii) of the Act. The Ld. AO made addition of Rs. 1,19,23,200/- by invoking the provisions of 6 section 56(2)(viia) of the Act. Accordingly, the Ld. AO computed the income of the assessee under normal provisions and determined the net tax payable at Rs. 49,37,72,670/- and Rs. 31,31,34,641/- under the MAT provisions and passed the assessment order on 29/12/2017 u/s. 143(3) r.w.s 153A of the Act.
Aggrieved by the order of the Ld. AO, the assessee went on appeal before the Ld. CIT(A)-3, Visakhapatnam by agitating that since the notice issued by the Ld. AO u/s. 153A is perverse in law as no incriminating material was found during the course of search and therefore the assessment made pursuant to section 153A is not justified. Before the Ld. CIT(A), the assessee also raised grounds against the additions made by the Ld. AO.
5. On appeal, the Ld. CIT (A), on the issue of validity of search and consequent to assessment proceedings, called for the remand report from the Ld. AO. On perusal of the Remand Report as well as the Rejoinder of the assessee, the search conducted by the Ld. Revenue Authorities is held to be valid and following assessment proceedings were also held valid by the Ld. CIT(A). Accordingly, the Ld. CIT(A) rejected the assessee’s grounds of appeal on these issues.
6. On the issue of additions made by the Ld. AO, in the absence of any incriminating material found during the search and seizure action 132 of Act, the Ld. CIT(A) held that since the Ld. AO made additions on the basis of the details sought / filed by the assessee during the course of assessment proceedings and the examination of the accounts of the assessee. The Ld. CIT (A) held that the additions are not based on seized material which was also not denied by the Ld. AO in his remand report.
Accordingly, the Ld. CIT(A) held that some of the additions made by the Ld. AO are not warranted and granted part relief to the assessee in respect of the grounds raised by the assessee on this issue.
7. The Revenue has raised the following grounds in appeal (AY 2013-14):
“1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition U/s. 68 of the Act.
2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition U/s. 68 of the Act without appreciating the fact that all the three ingredients of identity, creditworthiness and genuineness of transaction need to be proved to treat a credit as genuine.
3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the addition made on interest claims on bogus creditors?
8 4. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the adtion made by the AO U/s. 40(a)(ia) without appreciating the fact that interest was paid to one of its group companies without deducting the tax at source.
Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance made U/s. 36(1)(iii) without appreciating the fact that when there is no evidence produced by the assessee regarding capital asset acquired out of the loan is put to use during relevant assessment year and the interest should have been capitalized.
Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was erred in holding that section 56(2)(viib) is not in operation for the entire assessment year ie for AY 2013-14 without considering the Hon’ble Supreme Court in the case of Reliance Jute & Industries Limited vs. CIT reported in 120 ITR 921 (SC) (1979) wherein the Court has held that “it is a cardinal principle of the tax law that the law to be applied is that in force in the assessment year unless otherwise provided expressly or by necessary implications.
Any other ground of appeal that may arise at the time of hearing.”
8. With respect to Ground No.1, 2 & 3, the Learned Departmental representative argued that the assessee has taken unsecured loans for which no confirmations were submitted before the Ld. AO. The Ld. DR further submitted that these loans were taken from unrelated parties without any security. The Ld. DR also submitted that the rate of interest charged by unsecured loan creditors is 3% as against the prevailing market rates. The Ld. DR therefore pleaded that in this scenario the loans are not 9 genuine and hence the Ld. AO has rightly made the addition u/s. 68 of the Act. Further, the Ld. DR submitted that no confirmation replies were received from the parties for the letters written by the Ld. AO. The Ld. DR therefore pleaded that the order of the Ld. AO be upheld.
Per contra, the Ld. AR submitted that the rate of interest is not 3% as alleged by the Ld. DR but it is 12% where the assessee has paid 9% of interest on the unsecured loans accounted through the books of account subject to deduction of tax at source. The Ld. AR further submitted that the 3% interest rate is paid by cash outside the books of account of the assessee.
Therefore, the Ld. AR vehemently argued that the loans are of a genuine nature since interest payments have been made by the assessee after deduction of tax at source. The Ld. AR further submitted that these loans were repaid in the AY 2014-15. The Ld. AR further submitted that all confirmations were provided to the Ld. AO but the Ld. AO failed to examine the same. Therefore, the Ld. AR pleaded that the order of the Ld. CIT (A) be upheld.
We have heard both the parties and perused the material available on record and the orders of the Ld. Revenue Authorities. It is seen from the records that the assessee has 10 taken unsecured loans from various parties aggregating to Rs.
16,08,00,000/-. It is also not disputed by the Revenue that the interest payments were made @ 9% which was subjected to deduction of tax at source. We also find from the impounded material that the names of the lenders, the amounts lent to the assessee and his group companies has been recorded in loose sheets for the purpose of calculation of interest @ 3% which was paid outside the books of accounts. It was the case of the Assessing Officer that the assessee has routed their own cash through fictitious lenders. However, there is no evidence found by the Revenue during the search and seizure operations that the assessee has paid the cash to the extent of loans received.
Further, we find from the order of the Authorities below that there is no record of details of the back to back cash receipt for the payment of interest made through banking channels. The fact brought out by the Ld. AR that the seized material wherein the details of the names of the lenders and the amounts borrowed by the assessee and its group companies was before the Ld. Revenue Authorities. The Ld. CIT(A) therefore has rightly deleted the addition made by the Ld. AO with respect to the unsecured loans and hence no interference is required in his order.
11 Accordingly, the Grounds No.1, 2 &3 raised by the Revenue are dismissed.
With respect to Ground No.4 against the disallowance of Rs. 1,33,58,461/- u/s. 40(a)(ia) of the Act being the interest payment on loans borrowed from Andhra Pradesh State Finance Corporation (APSFC) U/s 194A of the Act. The Ld.AR argued that the assessee company was required to extend corporate guarantee for repayment of terms loans along with interest in addition to the collateral securities and the personal guarantees of Promoter Directors. The said term loan was later transferred to the assessee company on 1/4/2012 by way of journal entries in the books of accounts. Since the loan was sanctioned to M/s.
ATR Cars Pvt Ltd., a subsidiary of the assessee company, the assessee company made interest payments to M/s. ATR Cars Pvt Ltd, payable to APSFC, which was subsequently paid to APSFC.
The Ld. AR argued that since the assessee company could not avail additional loans, the assessee availed loans from APSFC through M/s. ATR Cars Pvt Ltd, and hence there is no requirement of deduction of tax at source and hence no disallowance is warranted. The Ld. AR therefore pleaded that the order of the Ld. CIT(A) be upheld on this ground.
12 Per contra, the Ld. DR submitted that the loan is in the name of M/s. ATR Cars Pvt Ltd., and the payment of interest was made to M/s. ATR Cars Pvt Ltd. Therefore, the Ld. DR pleaded that the provisions of section 40(a)(ia) are attracted since the payments are not directly made to APSFC.
We have heard both the parties and perused the material available on record. It is not disputed that the term loan taken in the name of M/s. ATR Cars Pvt Ltd., has been transferred to the assessee company on 1/4/2012. The claim of the Ld. AR that the assessee could not avail any term loan and hence it was availed in the name of M/s. ATR Cars Pvt Ltd., needs to be considered. Further, from the Ld. AR’s submissions we note that M/s. ATR Cars Pvt is a subsidiary of the assessee company.
Since the assessee has guaranteed the loan ultimately the liability will devolve on the assessee in case of failure by M/s.
ATR Cars Pvt Ltd. It is also not disputed by the Revenue that the amount of Rs. 9,58,38,166/- transferred on 1/4/2012 was fully utilized by the assessee company and not by M/s. ATR Cars Pvt Ltd. The Ld. CIT(A) in his findings has observed that based on the peculiar facts of the case, since the interest is ultimately paid to APSFC, deduction of tax at source is not required in the 13 instant case and hence the provisions of section 40(a)(ia) are not applicable. We find that the Ld. CIT(A) has rightly considered the facts in these peculiar circumstances and has deleted the addition made by the Ld. AO. We therefore find no interference is required in the order of the Ld. CIT(A) on this ground.
Accordingly, Ground No.4 raised by the Revenue is dismissed.
With respect to Ground No.5, the Ld. DR argued that the assessee has advanced Rs. 1,31,83,437/- to Smt. D. Jhansi Lakshmi and Rs. 94,16,363/- to Sri D. Seshagiri Rao which are not related to the business activity carried out by the assessee.
The Ld. DR submitted that these advances are made out of the borrowed funds of the assessee and therefore the interest paid by the assessee to be proportionately disallowed. The Ld. DR therefore pleaded that the order of the Ld. AO be upheld.
The Ld. AR submitted that these advances were made out of the interest free funds available with the assessee and the details have been submitted before the Ld. AO. Further, the Ld. AR submitted that these advances have been closed within one month. The Ld. AR also submitted that these advances were utilized for purchase of property by the assessee which was registered on 30/04/2012 and hence these funds are utilized for 14 the purpose of business of the assessee. He therefore pleaded that the order of the Ld. CIT(A) be upheld.
We have heard both the parties and perused the material available on record. We find from the order of the Ld. CIT(A), the Ld. AO has submitted his remand report that these impugned sums were utilized for acquisition of a capital asset and cannot be allowed as revenue expenditure. The Ld. AO therefore disallowed the proportionate interest u/s. 36(1)((iii) of the Act.
However, the Ld. AO failed to consider the fact that Smt. D.
Jhansi Lakshmi and Sri D. Seshagiri Rao are the owners of the property located at Chinna Waltair and the advances was paid by the assessee company for the purpose of purchase of the property which was registered on 30/4/2012 in favour of the assessee.
Purchase of property by an assessee is part of a business strategy and shall be considered for the purpose of business and hence the disallowance made by the Ld. AO is rightly deleted by the Ld. CIT(A). We therefore do not wish to interfere with the order of the Ld. CIT(A) and dismiss the Ground No.5 raised by the Revenue.
With respect to Ground No.6 treating the sum of Rs. 75.52 Crs as income from other sources u/s. 56(2)(viib) of the Act, the 15 Ld. DR argued that the shares were issued at a huge premium of Rs. 3,900/- per share as against the face value of Rs. 100/- per share. The Ld. DR submitted that the assessee has revalued its immovable properties at Rs. 565.44 Crs by a Registered Valuer and that valuation of immovable properties has been applied in the calculation of Net Asset Value per share by the assessee company. The Ld. DR submitted that the Valuer was summoned U/s. 131(1A) of the Act, to examine the basis for such huge valuation. The Ld. DR submitted that the Valuer could not provide any scientific basis or documentary evidence with respect to the valuation of the immovable property and hence should be rejected. The Ld. DR submitted that the Ld. CIT (A) has also erred in applying the provisions of section 56(2) r.w. Rule 11UA of the IT Rules, 1962 for the AY 2013-14 stating that the Rule was introduced w.e.f 25/11/2012 only. The Ld. DR also submitted that the SRO value of the immovable properties stood at Rs. 107.51 Crs as against Rs. 565.44 Crs valued by the Registered Valuer. The Ld. DR therefore pleaded that the SRO value should be used in the valuation of immovable properties and accordingly share premium shall be decided. The Ld. DR therefore pleaded to uphold the order of the Ld. AO.
16 Per contra, the Ld. AR submitted that the assessee was purchasing lands from its seven group companies located at Polepalli Village of Bhogapuram Mandal for a sale consideration of Rs. 83.22 Crs. The Ld. AR submitted that Rs. 5,75,84,000/- was paid by way of cash and the balance was paid by way of allotment of 1,93,655 shares in the assessee company with a face value of Rs. 100/- issued at a premium of Rs. 3,900/- per share.
The Ld. AR submitted that the Ld. Revenue Authorities have not disputed the agreed sale consideration of Rs. 83.22 Crs, proposed to be purchased by assessee. The Ld. AR submitted that as per section 56(2)(viib), the fair market value has to be taken for the purpose of valuation of immovable properties. The Ld. AR also submitted that the SRO valuations are for the purpose of calculating the stamp duty and always fair market value of the property will be more than the SRO value. Further, he submitted that the Registered Valuer is a CBDT Empanelled Valuer. The Ld. AR also submitted that the valuation of share was also done under Discounting Cash Flow Method (DCF Method) at Rs 4100
per share, which was also submitted to the Ld. CIT(A). The Ld.
AR also submitted that the allottees have also disclosed the sale value of the land to the assessee company while filing their respective return of income. The Ld. AR further submitted that 17 section 56(2)(viib) was introduced by the Finance Act, 2012 which was assented by the Hon’ble President of India on 28/5/2012 whereas the allotment of share in the assessee company was made on 25/2/2012. Further, he submitted that the Rule 11UA was introduced on 29/11/2012 and therefore cannot be applied in the allotments made on 25/2/2012 as there was no notified manner as on the date of allotment, in which the fair market value of the unquoted equity shares are to be determined. The Ld. AR therefore pleaded that the order of the Ld. CIT (A) be upheld.
We have heard both the parties and perused the material available on record. Admitted facts are that the assessee has entered into an agreement for buying a property for an agreed sale consideration of Rs. 83.22 Crs from its seven group companies which was not disputed by the Revenue and it has also been disclosed in the respective returns of the group companies. The only issue is with respect to valuation of the immovable properties held by the assessee for the purpose of allotment of equity shares as a sale consideration for the purchase of land from seven group companies. The Finance Act, 2012 introduced the applicability of section 56(2)(viib) of the Act
18 to curb the black money in the form of exorbitant premium of equity shares. In the instant case, there is no dispute on the sale consideration payable towards purchase of property by the assessee from its group companies and hence the deployment of black money in the form of share premium does not arise.
Further, we note that there is a merit in the argument of the Ld. AR that when the Rule 11UA was introduced w.e.f 29/11/2012 deserves consideration, as the date of allotment of equity shares was much before the introduction of Rule 11UA, i.e on 25/2/2012 on which date there is no prescribed method for valuation of unquoted equity shares. Further, the appellant under DCF Method valuing the equity shares of Rs. 4,100/- was also not disputed by the Revenue. The Value under DCF Method is also above the share premium issued to the various companies.
In the light of the above, we find that the Ld. CIT(A) has rightly deleted the addition of Rs. 75,05,08,016/- with respect to the share premium and therefore we are of the considered view that no interference is required in the order of the Ld. CIT(A) on this Ground. Accordingly, Ground No.6 raised by the Revenue is dismissed.
19 16. Grounds No.1 and 7 are general in nature and therefore needs no adjudication.
In the result appeal filed by the Revenue is dismissed. C.O. Nos.30/Viz/2021 (In आयकर अपील सं./ (�नधा�रण वष� / Assessment Years: 2013-14)
With respect to Cross Objection raised by the assessee, it is supportive in nature. Therefore, while adjudicating the Revenue’s appeal for the AY 2013-14, we have upheld the decision of the Ld. CIT(A) on various issued as discussed herein above, the adjudication of the Cross Objection becomes infructuous.
In the result, Cross Objection filed by the assessee is dismissed as infructuous.
आयकर अपील सं./ & 106/Viz/2020 (�नधा�रण वष� / Assessment Years: 2014-15 & 2015-16)
The Revenue has filed these two appeals for the AY 2014-15 & 2015-16 and raised the identical grounds of appeal to that of the grounds of appeal raised in for the AY 2013-14. The only difference is the Revenue has not raised any ground in 2014-15 and 2015-16 with respect to section 20 56(2)(viib) which is raised in the AY 2013-14. Therefore, since the issues raised in the Revenue’s appeal for the AY 2013-14 are identical to that of the grounds raised
in AYs 2014-15 & 2015-16 (except ground no.6 in AY 2013-14), our decision given in applies mutatis mutandis to the appeals in ITA No.105 & 106/Viz/2020 also. Accordingly, grounds raised by the Revenue in these appeals are dismissed.
21. In the result, both the appeals filed by the Revenue are dismissed. CO. Nos. 31 & 32/Viz/2021 आयकर अपील सं./ I.T.A. Nos.105 & 106/Viz/2020 (�नधा�रण वष� / Assessment Years: 2014-15 & 2015-16)
22. With respect to Cross Objections raised by the assessee, they are supportive in nature. Therefore, while adjudicating the Revenue’s appeal for the AY 2014-15 & 2015-16, we have upheld the decision of the Ld. CIT(A) on various issued as discussed herein above, the adjudication of the Cross Objection becomes infructuous.
In the result, Cross Objection filed by the assessee is dismissed as infructuous.
21 24. Ex-consequenti, three appeals filed by the Revenue are dismissed and the Cross Objections filed by the assessee are dismissed as infructuous.
Pronounced in the open Court on the 21st December, 2022.
Sd/- Sd/- (दु�वू� आर.एल रे�डी) (एस बालाकृ�णन) (DUVVURU RL REDDY) (S.BALAKRISHNAN) �या�यकसद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER Dated : 21.12.2022 OKK - SPS आदेशक���त�ल�पअ�े�षत/Copy of the order forwarded to:- �नधा�रती/ The Assessee–Shri Anumolu Tirupati Rayudu (HUF), D.No. 11-
1. 1. 8-34, Daspalla Hills, Visakhapatnam, Andhra Pradesh-530002. (ii) M/s. ATR Warehousing (P) Limited, D.No. 11-8-34, Daspalla Hills, Visakhapatnam, Andhra Pradesh-530002. राज�व/The Revenue –The Deputy Commissioner of Income Tax, Central 2. Circle-2, D.No. 11-8-34, Daspalla Hills, Visakhapatnam, Andhra Pradesh – 530002.
3. The Principal Commissioner of Income Tax (Central), Visakhapatnam. आयकरआयु�त (अपील)/ The Commissioner of Income Tax (Appeals)-3, 4. Visakhapatnam. �वभागीय��त�न�ध, आयकरअपील�यअ�धकरण, �वशाखापटणम/ DR,ITAT, 5. Visakhapatnam गाड�फ़ाईल / Guard file 6. आदेशानुसार / BY ORDER
Sr. Private Secretary ITAT, Visakhapatnam